You Get What You Pay For

The New York Times published a lengthy article today about Philip and Joel Levy, brothers from Brooklyn who until recently held the top positions at the Young Adult Institute Network, a giant non-profit organization that provides services and runs group homes for developmentally disabled people in New York.  From the tone of the article and its headline, "Reaping Millions in Nonprofit Care for Disabled," one can assume readers are meant to feel indignant at the generous salaries and benefits received by the Levys, financed largely by Medicaid money.  Indeed, should there be any doubt, note that the article is part of series about malfeasance among providers of services for the disabled--a series with the eye-catching title, "Abused and Used."

Certainly one of the most noble and vital services the news industry provides is shining a light on corruption and the misuse of public funds.  As we read this article, though, we felt a bit "abused and used" ourselves.  Specifically, we felt that the Levy brothers hardly embody the sort of massive corruption that merits a front-page expose on the paper of record.

The charges of financial impropriety mainly arise from some questionable--though hardly egregious--expenditures by the Young Adult Institute.  For starters, the Levys were paid quite well: Each earned close to $1 million a year.  This compares quite favorably with executives of "similar-sized non-profit groups in New York," who earn, according to the article, an average salary of close to $500,000.  We'll take the Times' word for it about the $500,000 average salary of other non-profit CEO's--although the article doesn't specify what "similar-sized non-profits" means.  On the face of it, though, a $1,000,000 annual salary for the chief executives of "the largest operator of group homes" in New York, whose services also include "day programs, a school, dental care, and transportation for the developmentally disabled" doesn't seem particularly out of line.  Other questionable expenses included the use of agency funds to pay for college tuition for executives' children, car allowances, hotel expenditures for fund-raising trips, and a $50,000 charge to help Philip Levy's daughter purchase a Greenwich Village apartment while she was in graduate school.

Outrageous?  Maybe.  As the article points out, though, all of these charges were approved by the non-profit organization's board.  Furthermore, with the exception of the $50,000 gift to Levy's daughter, all of these expenditures sound unspectacular when considered as compensation for chief executives of a multi-billion dollar corporation, non-profit or not.  As citizens, we should scrutinize the use of taxpayer dollars, but we should not be so quick to condemn out of hand large sums of money just because they seem, to us, "large."

Could the YAI board have paid the Levy brothers less?  Sure.  But how much less?  These are skillful executives.  One point the article makes is that, while YAI executives are highly compensated, they also provide exemplary services:  "The organization and the Levys have earned many admirers in the field for the quality and range of their programs."  A parent of a YAI resident "said the organization excelled at hiring caring people, investing in training and supervising programs."  As any executive compensation expert will attest, to attract talented people, you must provide attractive compensation, which may well include a high salary and/or benefits like tuition reimbursement.

Maybe the Levys would have done the same job for less money.  Maybe when the board replaces the Levys (who have retired), equally skilled executives will be found who will work for less.  We wish the board luck.  Still, in an era when bank executives receive multi-million dollar bonuses for running their companies into the ground and decimating the lives and livelihoods of average Americans, we find it hard to begrudge a generous compensation for a couple of guys who have devoted 40 years of their lives to helping the most defenseless members of society and who have apparently done a pretty good job of it.

Spoils of Charity

With all the talk in Washington about restricting bankers' pay, we suppose it was only a matter of time before legislators turned their attention to the real egregious violators of common decency, non-profit managers! (Hmmm. . . "non-profit"? Sounds like a commie plot to me! [a-HOOG, hawk, spit!])

In principle, we agree that non-profit organizations should expend the bulk of their revenues on programs and services consistent with their mission statements, and that exorbitant paydays for chief executives at these organizations are unseemly. When one looks at the straw men set up by lawmakers to argue against these "exorbitant paydays," though, one's bile-meter creeps upward.

Consider that the whipping boy (or girl) for those who would rein in egregious violations of NPOs' fiduciary responsibilities is Ms. Roxanne Spilett, chief executiveof the Boys and Girls Clubs of America, who received total compensation of nearly $1 million in 2008 (about half of which was retirement and other benefits). "'A nearly $1 million salary and benefit package for a nonprofit executive is not only questionable on its face but also raises questions about how the organization manages its finances in other areas,' said Senator Tom Coburn, Republican of Oklahoma."

Sure, a million-dollar salary sounds huge--OK, it is huge--but let's put it in perspective, as Senator Coburn suggests. One of the major responsibilities--if not the main responsibility--of a non-profit manager is to ensure that the organization is able to maintain operations. It is thus reasonable to measure a manager's success based at least partly on the revenue he or she helps generate. According to the Boys and Girls Clubs annual report, the organization took in revenue of over $127 million in 2008. Thus, Ms. Spillett's total compensation comes to about 0.8% of revenue--or 0.4% if we look only at her salary.

To put this in perspective, in 2007 Lloyd Blankfein, the CEO of Goldman Sachs, received a salary equal to about 0.6% of that firm's net revenues. Granted, this is net revenue, while the figure we quoted for Ms. Spillett is a percentage of total revenue. At the same time, though, since a non-profit organization is not supposed to maximize net revenue (another word for which is "profit"), we think the comparison is apt. Furthermore, it shows that Spillett's compensation is well within the range of what may be considered appropriate compensation for a manager of a large organization. (OK, her total compensation may be slightly higher as a percentage of revenues than a Wall Street Master of the Universe; in fairness, though, she probably didn't play as big a role in demolishing the global economy as Blankfein, either.)

One more thing: When Roxanne Spillett heard she was being singled out by Congress, here was her response:

In an interview, Ms. Spillett, joined by Mr. Goings, choked up when she was asked what had happened the day the senators first raised the issue of her compensation. “I can’t talk about it,” she whispered, tears in her eyes.

She said the day had been the worst she could remember. “I have worked in the organization for 32 years, and I’ve never been motivated by a dime, not for a single minute,” she said.

She said she had contacted board members and demanded that they stop putting money into her supplemental retirement plan, which gave the impression that she took home more than she actually did. “I said, “Forget it, take it away,’ ” Ms. Spillett said. “I cannot watch our movement get hurt by this. I don’t want it to hurt our ability to help kids.”

Mr. Goings said the board had reluctantly agreed. “We felt that would be sending a signal to these guys that we did something wrong — and we didn’t,” he said, referring to the senators. “We really pushed back, but Roxanne pushed harder.”

It's funny. We don't remember too many tears in the eyes of Blankfein and his ilk.

(Image of Roxanne Spillett from Boys and Girls Club of America)